The mortgage indemnity guarantee scheme explained

95% Mortgage

Contraction of the mortgage market and a general risk aversion amongst traditional lenders has forced the hand of government to take action in the hope of stimulating the markets. This action has come in the form of the Mortgage Indemnity Guarantee, a scheme designed to encourage higher loan to value lending secured against new build houses with the introduction of a guarantee to cover potential losses.

Under the scheme, lenders will offer 95% mortgages (LTV) on new-build properties with the added protection of an indemnity guarantee funded jointly by house builders and the government. The guarantee can be called upon by lenders in the event that loans go bad and result in losses. The purpose of the scheme is to reduce the amount of deposit required to purchase, thereby allowing many more people to consider buying a home or moving up the property ladder. At the same time, the initiative is designed to give the construction industry a much needed boost.

The guarantee is 8% of the value of the property, 5.5% to be funded by the government and the remaining 3.5% from the house builders. The scheme is to be available to both first time buyers and house movers, provided the transaction involves a new build property which is to be used as the main residence.

The scheme was first proposed in November 2011 and is now operational with a small number of lender’s participating and many more planning to enter the market. The overall scale is likely to be substantial with qualification for purchases of houses valued at up to £500,000 and initial proposals to extend to a maximum of 100,000 properties. This has been described by the government as a ‘manageable risk’.

Critics of the scheme argue that it could result in artificial price inflation for new build properties, particularly if house builders seek to pass on their additional costs to the buyer. However, prices do need to remain competitive to ensure sufficient demand, and after 7 years, the builders 3.5% contribution will be refunded minus a portion of any losses incurred by the scheme as a whole.

Any measure which stimulates growth in the housing market can only be welcomed; however it remains important to remember that borrowing at a high loan to value needs to be affordable and sustainable allowing for future changes to interest rates. For example, for a 25 year repayment mortgage of £150,000, a 1% change in interest rates could result in an increase to monthly payments of nearly £85. In the current stable interest rate environment, it is easy to forget that during the mid 80s, interest rates peaked at 14.00% a 13.50% increase on the current Bank of England Base Rate!

The information contained in this article is based on current legislation and tax rates, and could be subject to change in future.

Your home may be repossessed if you do not keep up repayments on your mortgage.

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